Annual prepayments released month by month
Why an annual prepayment is not a year's revenue on day one, and how the SaaS pack invoices on the cycle and releases the prepayment month by month.
By Achekam · · 4 min read · For Software (SaaS) businesses in South Africa, Nigeria, Kenya
Launching soon. The Industry CRM add-on described in this article is launching soon. This article describes it as it will work at launch.
An enterprise customer agrees to pay for a full year up front. Cash lands in the bank, the founders celebrate, and the month's management accounts show a record month. The next eleven months show nothing from that customer at all.
Anyone reading those accounts, whether an investor, a lender or your own board, gets the wrong picture twice: one month looks far better than the business really did, and the rest look worse. The fix is an old and well-understood piece of accounting called deferred revenue, and the SaaS pack in Achekam's Industry CRM handles it as part of its subscription billing.
Why a prepaid year is not a year's revenue on day one
When a customer pays for twelve months of service, you have not yet earned twelve months of revenue. You have received money for a service you still owe. Under the revenue standards most companies report under, IFRS 15 for full IFRS reporters and the equivalent section of IFRS for SMEs for smaller ones, revenue is recognised as the service is delivered. The IFRS Foundation's summary of IFRS 15 Revenue from Contracts with Customers sets out the principles for reporting revenue from contracts with customers and the five-step model the standard uses.
So on the day the annual payment arrives, the honest position is:
- the cash is yours, in the bank;
- the service is still owed, so the unearned part is a liability, usually called deferred revenue or a contract liability;
- each month, as you provide the service, a slice of that liability becomes revenue.
Nothing about this changes the cash. It changes when the income shows in the income statement, so that each month's accounts show what that month actually earned.
Invoicing subscriptions on their cycle
Subscriptions in the SaaS pack are invoiced on their own cycle. A monthly subscription is invoiced monthly; an annual one is invoiced once a year, on its date. In the pack's terms, the customer is an Account and the agreement is the signed Order form, so each subscription invoice traces back to what was sold.
Each invoice is still an ordinary Achekam invoice. Issuing it takes the next number in your sequence and posts it to the ledger. The difference for an annual prepayment is what happens over the following months.
Releasing the prepayment month by month
For an annual prepayment, the SaaS pack releases the amount as revenue month by month. In words, using a customer who pays for a year starting at the beginning of a month:
- On invoicing, the year's fee is billed in full, and the customer owes it or has paid it.
- At the end of the first month, one month's share moves into revenue.
- Each month after that, another month's share moves across.
- After six months, half the fee has been released and half is still deferred.
- At the end of the year, the whole fee has become revenue and nothing is left deferred, just as the renewal invoice arrives.
Subscriptions, renewals and deferred revenue are part of the Industry CRM's third wave, so this release sits alongside the subscription records and renewal dates the pack keeps.
What the balance sheet shows meanwhile
Between invoice and year end, the part of the fee not yet released sits on the balance sheet as deferred revenue, a liability. Read it as "service we still owe our customers".
For a growing subscription business, that figure is a useful number in its own right. A rising deferred revenue balance means customers are committing further ahead. A falling one, while sales say the pipeline is full, deserves a question.
It also matters if a customer cancels mid-year and your terms promise a refund of the unexpired part. The deferred balance shows exactly what has not yet been earned.
When a refund of the unexpired part is due, the correction starts from the original invoice: a credit note is always issued from the invoice it corrects, in full or for chosen lines, and leftover credit is held for the customer.
What to agree with your accountant
Deferred revenue is standard practice, but the details are choices. Agree these before the first annual invoice goes through:
- The release pattern. Equal monthly slices are the usual choice for software that is available evenly through the year.
- Mid-month starts. Whether a subscription that starts on the fifteenth releases a part-month first, or starts releasing the following month.
- Implementation and training fees. Whether these are earned when the work is done, separately from the subscription; your onboarding and go-live acceptance help evidence when that was.
- Cancellations. How an unexpired refund is credited, and how the remaining deferred balance is cleared.
- VAT. The monthly release is an accounting matter. When VAT on an annual invoice falls due is a separate question under your country's VAT rules, so ask your accountant rather than assuming VAT follows the release.
- Reporting. Whether your investors want annual recurring revenue alongside revenue, and who reconciles the two.
Renewal dates drive the next annual invoice, so make sure staff are reminded in good time; see renewal and notice-deadline reminders. Customers who barely use the product are the ones most likely to ask for a refund of the unexpired part, which is why tracking account health without a usage feed matters to finance as well as sales. And for how annual deals arrive in the first place, read from product trial to won deal.
Before the next annual deal closes, write your release rule and your refund rule on one page and agree them with your accountant. Then each prepayment follows the same path, month after month.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
